Pa.'s Tax System Grows More Unfair: Low-Income Pay Price

Pennsylvania often falls near the bottom of state rankings – for instance, 47th in job growth and 48th in funding for public higher education per capita. So, at first blush, it might seem like good news this week that the commonwealth came in sixth place for something. Unfortunately, it’s in a ranking of how unfair states’ tax systems are.

The fifth edition of the biennial study Who Pays? A Distributional Analysis of the Tax Systems in All Fifty States put Pennsylvania on the “Terrible 10” list of states with the most regressive taxes for the fifth time, dropping it from eighth worst two years ago to sixth worst this year. Also in the top 10 are Washington State, Florida, Texas, South Dakota, Illinois, Tennessee, Arizona, Kansas and Indiana.

These states take a much larger tax bite from lower-income residents than they do from wealthy residents. In Pennsylvania’s case, the lowest-income earners pay three times more, and middle-income earners pay two times more, in taxes as a share of their income than the wealthiest earners. So the poorest fifth of Pennsylvania families, earning less than $20,000 annually, pay 12 percent of their income in state and local taxes, while the top 1 percent, with annual incomes averaging $1.24 million, pay 4.2 percent of their income. And that’s down from 4.4 percent two years ago.

In comparison, middle-income taxpayers pay 10.3 percent of their income in taxes, up from 10.1 percent in 2013. Meanwhile, the top 1 percent’s income grew four times as much as the middle group’s income during this same period, 16.4 percent vs. 4.1 percent in non-inflation adjusted dollars. So the wealthiest Pennsylvanians are making more money and paying a smaller share of it in taxes than they did two years ago.

If this system seems unfair and illogical to you, that’s because it is. Ken Regal, executive director of Just Harvest, sums up the problem this way: “As one of Pennsylvania’s largest providers of free tax filing assistance to low-income households, we’ve seen first-hand for years the effect of regressive tax rates on the daily lives of the working poor. Levying high taxes on low wages is like trying to squeeze blood from a stone; it leaves state education and social programs underfunded and pushes more Pennsylvanians into poverty.”

This imbalance in “who pays” happens mostly because we have a flat income tax. In addition, we offer no income tax refund to low-income earners to offset the more regressive sales, excise and property taxes they also pay. Plus, previous legislatures failed to adopt combined reporting requirements to permanently close corporate tax loopholes.

So what’s the solution? PBPC Director Sharon Ward says “it’s time to halt Pennsylvania’s steady march to the top of the most regressive tax system list. A more progressive approach to income taxes, a refundable earned income tax credit for low-income families, and a commitment to close corporate tax loopholes once and for all will finally make our tax system fair for working- and middle-class Pennsylvanians.”

Governor-elect Wolf, who takes office in a few days, has made tax fairness a central goal of his administration. He has proposed revamping the tax system to give lower- and middle-income taxpayers a break and to require wealthy taxpayers to pay their fair share. Let’s hope the new legislature works with the new governor to make these needed reforms a reality.

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